Japan Year-End Tax Adjustments

Foreigners living and working in Japan who are accustomed to filing their income taxes might be surprised to learn that not every other country makes you do so. If you’re an employee working and living in Japan, you might be considered a resident, or “inhabitant,” for tax purposes, which means you may qualify for a streamlined procedure that takes you off the tax-filing hook. You might then wonder: why is filing taxes so cumbersome in some countries?

Japan Income Tax for Wage Earners

The painless version of the Japan personal income tax system is called the NENMATSU CHOSEI, which roughly translates to Year-End Adjustment. In any event, most wage earners in Japan, including foreign inhabitants, have their income tax payments automatically withheld each paycheck and receive a special adjustment at year-end to pay or refund the tax balance.

Bottom line for inhabitants: if you qualify, there’s no need to file a tax return. Your employer will do it for you.

Do You Qualify?

Employees can participate in NENMATSU CHOSEI as long none of the following conditions apply:

You leave Japan before the year ends

You work for a non-Japan based employer

You work for more than one employer (i.e. multiple Part-Time employers, side income, etc…)

You earn more than 20,000,000 yen a year

You earn other annual income in excess of 200,000 yen (about $1,750)

You will still have to do some paperwork — your employer will provide you with NENMATSU CHOSEI Hyo withholding forms sometime in November/December. It’s more than likely you have already received them. These forms will ask you to confirm possible changes during the year, including dependents, contributions paid to private insurance companies, life insurance, mortgage interest, Social insurance premiums, earthquake insurance, etc… Please note these are deductions that can help offset your total income for the year and possibly assist with an income tax refund. The employer will calculate the year-end taxes and factor in these adjustments. Assuming you qualify, the year-end adjustment occurs on your last paycheck. No muss, no fuss. You might also have to pay local taxes to your prefecture or municipality — they’ll send you a bill that you pay directly. Please note that should you receive a refund on your last paycheck for the year. This does not factor inhabitant tax. This is a separate tax, so don’t be surprised when you get your tax bill in May.

We have talked about refunds, but what are the other possibilities? For some unfortunate souls, that last take-home paycheck of the year can sometimes be lower than what they are used to because they owed additional taxes. How does this happen? There are several reasons you could end up owing. First, you changed jobs during the year with varying wages. Or, you had a couple of part-time jobs to start and your employer withheld the bare bones. But when you combine the two, you end up etching higher up on the progressive income tax ladder. Maybe you claimed your spouse as dependent and come year-end, he/she earned above the threshold to claim as dependent. There are many reasons you might owe taxes. Understand your case prior to year’s end to avoid that nasty surprise — especially if you were planning a Christmas/New Year’s retreat.

Kakutei Shinkoku

If you don’t qualify for Nenmatsu Chosei (based on the qualification chart above), you’ll have to file a tax return no later than March 15 of the following year. You can file at your local zeimusho (tax office), via snail mail or online eTax. If your situation is complex, hire a tax accountant who can help identify possible deductions. Figuring the Japanese income tax requires calculating your salary deductions already taken and about 10 other deductions, including ones for mortgages, spouses, dependents, insurance, pensions, medical costs and miscellaneous losses.

Income taxes in Japan at the national level run between 5% and 40%. You will also need to pay inhabitant tax, which is roughly 10%. Factoring in all of this, Japan is up pretty high on world tax rankings for personal income tax. As mentioned above, Taxation of personal income tax in Japan is progressive.
In other words, the higher the income, the higher the rate of tax payable.

Bottom line: check your paystub in detail. If you are unsure, ask your payroll clerk for an explanation. You will see changes to your taxes at year-end. Hopefully, a hefty refund awaits.

In our next topics, we will discuss residency issues with taxation, including if you are a permanent resident, non-permanent resident or non-resident. All of these have different methods of tax rules that apply.

Eric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.